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Pitney Bowes Inc. (NYSE:PBI)

Q3 2013 Earnings Conference Call

October 29, 2013; 08:00 a.m. ET

Executives

Marc Lautenbach - President & Chief Executive Officer

Michael Monahan - Executive Vice President & Chief Financial Officer

Charles McBride - Vice President, Investor Relations

Analysts

Kartik Mehta - Northcoast Research

Shannon Cross - Cross Research

George Tong - Piper Jaffray

Ananda Baruah - Brean Capital

Glenn Mattson - Sidoti

James Cappello - Invicta Capital

Operator

Good morning and welcome to Pitney Bowes, third quarter 2013 results conference call. Your lines have been placed in a listen-only mode during the conference call until the question-and-answer segment. Today’s call is being recorded. If you have any objections, please disconnect your lines at this time.

I would now like to introduce your speakers for today’s conference call; Mr. Marc Lautenbach, President and Chief Executive Officer; Mr. Michael Monahan, Executive Vice President and Chief Financial Officer; and Mr. Charles McBride, Vice President, Investor Relations.

Mr. McBride will now begin the call with the safe harbor overview.

Charles McBride

Good morning. Included in this presentation are forward-looking statements about our expected future business and financial performance. Forward-looking statements involve risks and uncertainties that could cause actual results to be materially different from our projections.

More information about these risks and uncertainties can be found in our 2012 Form 10-K, Annual Report and other reports filed with the SEC that are located on our website at www.pb.com and by clicking on Investor Relations. Please keep in mind that we do not undertake any obligation to update any forward-looking statements as a result of new information or developments.

Also for non-GAAP measures used in the press release or discussed in this presentation, you can find reconciliations to the appropriate GAAP measures in the tables attached to our press release and also on our Investor Relations website. Additionally, we have provided slides that summarize most of the points we will discuss during the call. These slides can also be found on our Investor Relations website.

Now, our President and Chief Executive Officer, Marc Lautenbach, will start with a few opening remarks. Marc.

Marc Lautenbach

Thanks Charlie and good morning everyone. Thank you for joining us. Mike will take you through the specifics of the quarter, but I would like to start by putting our third quarter into the context of our longer-term strategy.

Let me begin by saying, I’m very pleased with what we’re able to accomplish in the third quarter. Overall, we had very solid results, but more importantly, we got a lot done on our strategic to-do list. We’ve made out three chapters to our strategic transformation; stabilize our growing business, achieve operational excellence and finally, to drive growth in our digital commerce business. I will segment my remarks into those three chapters.

First, stabilize our mailing business. In the third quarter, equipment sales for SMB in production mail businesses increased 1% versus the prior year. Overall SMB equipment sales were essentially flat. In fact, North American equipment sales turned in one of the best year-over-year comparisons in eight quarters. Equipment sales are a good leading indicator of financing, rental, supply and support services revenue.

Perhaps most importantly, EBIT in our SMB business improved on a year-to-year basis, due in a large part to the productivity initiatives we have been undertaking for the last several quarters. Our EBIT margin in this business increased 180 basis points. This is the play we outlined earlier in the year, stabilizing revenue offset by substantial productivity opportunities. Again, our strategic intent in this business is to drive cash.

Second, achieve operational excellence. There are lots of ways to talk about operational excellence, but to my way of thinking, the benefits need to be found in the income statement, the balance sheet and the cash flow.

Adjusted EBIT grew 3.4% in the quarter. We announced our intent to redeem 300 million of bonds scheduled to mature in 2014, which further improves our balance sheet and free cash flow from operations was $208 million for the quarter and $440 million year-to-date, positioning us very well for our full year outlook.

Driving this performance, including improvements in our go-to-market, a divestiture over North American Management Services and all its furniture business, a substantial progress including our working capital performance, driven by our initiatives around reducing inventory and improving our DSO results.

Importantly, EBIT margin performance improved in SMB Solutions Group, Enterprise Solutions Group and in Digital Commerce.

Finally our Digital Commerce Solutions business performed very well, driving more than 10% growth at constant currency. Our ecommerce initiatives drove substantial growth and our software license revenue increased on a year-to-year basis. Software licensing growth is critical to the long-term vitality of the business. This is exactly the recipe we need going forward.

Perhaps as important, we took one of our strongest leaders, Christoph Stehmann and named him President of Ecommerce and Shipping Solutions. Christoph had been leading our production mail business, which you will recognize as the best performing business in the Pitney portfolio this year. Beyond Christoph’s outstanding recent performance, with his very strong experience in logistics and commerce, he is one of the best strategic thinkers we have in our business. Christoph began his career at McKinsey.

We also note that we’re reporting in our new segment structure. This is how we’re running the business; align our business units by strategic intent and client set. I know it will improve our ability to operate, but it will also improve our transparency, which I believe is our key dynamic in today’s capital markets.

We are taking important actions to create value for our clients and our shareholders, investing in our products, our team and our client relationships, at the same time we are improving our capital structure. To that end, I will remise if I do not mention that we have signed an agreement to sell our Corporate Headquarters building and planned to move into a new space most suitable for our business.

As I mentioned earlier, we are very pleased with our third quarter performance and feel good about where we are. As a result of our strong performance and year-to-year tax benefit realized in the third quarter, we are increasing the midpoint of our adjusted earnings per diluted share guidance from $1.70 to $1.76. That said, I want to remind everyone that this is a long journey and it will not be a straight line to the top.

Now let me turn it over to Mike for more detail on our third quarter performance.

Mike Monahan

Thank you Marc, and good morning. Before I get started on our financial performance, I’d like to take a few minutes to note some of the recent actions that we finalized in order to position our portfolio for growth and to also point out the changes in our reporting structure that are effective this quarter.

First, and as Marc spoke about, we have finalized the sale of both our Management Services and Nordic furniture business. We’ve recorded the operating results for these businesses in discontinued operations. We’ve also reclassified prior period results to reflect these changes. We will post these reclassified statements on our Investor Relations website.

Additionally, we’ve completed the first phase in realigning our business segment, consistent with the way we outline the business at our Analyst Day. We are now reporting small and medium business for SMB Solutions Group, the Enterprise Business Solutions group and the Digital Commerce Solutions segment.

The SMB Solutions group remains unchanged from the way we have been reporting it. In North America, the international mailing segments are included in this group.

Enterprise Business Solutions group is comprised of our production mail segment; however, production mail now excludes the revenue and cost associated with our Volly products. It also excludes the document management software that was previously recorded in the segment. These are now included with our other software products in Digital Commerce Solutions.

Our Presort Services segment is also recorded under the Enterprise Business Solutions group. The Digital Commerce Solutions segment includes the software that previously comprised our software segment, the document management software from production mail, Volly, ecommerce and marketing services.

You may recall that this is how we outlined the business on the Analyst Day and how we will now manage and report the business on a go-forward basis. We are working to breakout our shipping solutions that are currently still part of the North American Mailing segment. We expect that in the first quarter of next year, shipping solutions will be included as part of our digital commerce solutions reporting, since it is more closely aligned with our ecommerce product.

Turning to the quarter, as Marc indicated, we continue to make significant progress in implementing our long-term strategy and are laying the groundwork for our transformative journey. When isolated our actions may appear as one-time occurrence, but when taken in the aggregate, you will see the bigger picture is coming together.

For example, last quarter we announced the sale of our North American Management Services business and anticipated that we would close on the deal by the end of the year. Through the diligent efforts of our team, we were able to close this transaction in just under 65 days from when we announced it. By itself this was a major effort, but when you add in the sale of our Nordic furniture business, as well as a signed agreement to sell our World Headquarters business, you will see that we’ve made significant stride in the implementation of our strategy.

Additionally, we entered into an agreement to purchase our joint venture partners minority interest in our Brazilian business, which will provide us with further opportunity in this emerging growth market.

The message is clear. We are pursuing the goals we’ve setout for ourselves on Analyst Day. We are committed to stabilizing our core mailing business, while as the same time investing in our growth initiatives. We continue to rationalize our portfolio of products in the countries in which we operate. We are also reducing our cost structuring and continue to strengthen the balance sheet.

Turning to our financial performance for the third quarter, our results were relatively better than the second quarter when you take into consideration the unusually strong performance of production mail in the second quarter, which added 1.8 percentage point of growth.

Excluding that revenue growth from production mail, second quarter revenue would have declined more than 2%, while revenue this quarter declined less that 1%. Revenue this quarter was aided by double-digit constant currency growth in Digital Commerce Solutions, specifically from improving trends in ecommerce and software.

During the third quarter we had revenue growth in three of our five business segments and EBIT margin improvement in all of our segments. SG&A continued to decline, both on an absolute dollar basis, as well as a percentage of revenue. We also were able to realize a non-recurring tax benefit in the quarter. Cash flow also improved when compared to the prior year and prior quarter.

Let me take you through in more detail. For the third quarter revenue totaled $939 million. This was a decline of less than 1% on a constant currency basis when compared to the prior year. Revenue for the quarter on a constant currency basis grew 10.5% in the Digital Commerce Solution segment, grew 1% in the Enterprise Business Solution Group and declined 4% in the SMB Solutions group. These trends reflect the end market dynamics that we outlined on the Analyst Day.

Adjusted earnings per diluted share from continuing operations for the quarter were $0.49 per share, which included a $0.06 per share tax benefit, primarily associated with an affiliate reorganization.

GAAP earnings per diluted share from continuing operations were $0.38, which includes a non-cash asset impairment charge of $0.08 per share related to the sale of the company’s headquarters building and a restructuring charge of $0.03 per share, including a net loss in discontinued operations of $0.40 per share, which was primarily related to taxes on the sale of the North America Management Services business, through the net loss of $0.03 per share on a GAAP basis.

Adjusted earnings before interest and taxes or adjusted EBIT was $174 million this quarter or 3.4% higher than the prior year. Adjusted EBIT margin was 18.5%. There was EBIT margin improvement in all of our segments this quarter, which resulted in an overall improvement of 80 basis points when compared with the prior year.

Adding back depreciation and amortization, adjusted EBITDA for the quarter was $228 million or $1.12 per share. SG&A for the quarter was $355 million, a decline of $16 million or 4% versus the prior year. As a percentage of revenue, SG&A was 37.8%, which was an improvement of more than 120 basis points over the prior year. The improvement in our SG&A, while making investments in growth initiatives is yet another byproduct of our long-term strategies.

We are making progress in our new go-to-market model in the North America Mailing segment, which will improve our client experience and make our cost structure more variable across this business.

In the quarter we recorded a pre-tax restructuring charge of $9 million for actions that will benefit future periods. We also recorded a pre-tax $26 million asset impairment charge related to the signed agreement to sell our headquarters building, which when we move to another location will result in lower ongoing operating costs.

Net interest expense, which includes financing interest was $46 million, which was $1 million higher than the prior year. The average interest rate this quarter was 5.25%, which was 59 basis points higher than the prior year. Average outstanding borrowings during the quarter were $398 million lower than the prior year.

The effective tax rate on adjusted earnings for the quarter was 18.6% versus 24.8% last year. Lower tax rate this quarter was partially impacted by the nonrecurring tax benefit of $0.06 per share mentioned earlier.

Looking at free cash flow in the balance sheet. Free cash flow during the quarter was $208 million and on a GAAP we generated $215 million in cash from operations. Year-to-date we generated $440 million in free cash flow and $494 million in cash from operations.

Cash flow this quarter benefited from lower working capital requirements, as a result of aggressive inventory and accounts receivable management, which improved working capital by approximately $16 million versus the prior year. Cash flow also benefited from the timing of tax payments.

During the quarter we returned $38 million of cash to our common shareholders in the form of dividend and had $14 million of restructuring payments. We had $3.7 billion of debt on the balance sheet at the end of the quarter. This was $367 million less than at the end of last year. Additionally we announced that next month we will redeem 300 million of bonds that were originally scheduled to mature in August 2014, using the net proceeds from the sale of the Management Services business.

Now I’d like to discuss the third quarter results for each of our business segments. This information can also be found in our earnings Press Release and the slides that we posted to the pb.com website under the Investor Relations section.

North American mailing revenue for the quarter was $423 million and EBIT was $167 million. North American mailing revenue declined 5.2% on a constant currency basis and 5.6% on a reported basis versus the prior year. North American Mailing equipment sales declined less that 1% versus the prior year, which is an improvement over prior quarter trends.

Recurring revenue streams declined at a lesser rate than the prior year, but it was not an improvement when compared to the second quarter this year, due to lower financing and investment income on postage loans and deposits. EBIT margin was 39.6%, an improvement of about 190 basis points versus the prior year due to ongoing cost production initiatives, including the change in the segments go to market model.

International Mailing revenue for the quarter was $142 million and EBIT was $15 million. Year-over-year the asset revenues grew 1% on both a constant currency and recorded basis. Revenue benefited from growth in equipment sales, supply and support services in Europe and increased meter placements in India. EBIT margin was 10.9%, which was an improvement of about 300 basis points over the prior year due to ongoing cost production initiatives.

Turing to the Enterprise Business Solutions group, production mail revenue for the quarter was $116 million and EBIT was $11 million. Year-over-year revenue increased by 2% on a constant currency basis and 1% on a recorded basis. Revenue benefited from the sales of inserting equipment in North America and the installation of a production print order in Asia Pacific.

Supplies revenue grew as a result of the increased base of production print installations, but was partially offset by lower support and services revenue. EBIT margin of 9.1% was an improvement of 30 basis points versus the prior year due to growth in revenue and gross margin improvement.

Presort Services revenue for the quarter was $105 million and EBIT was $20 million. Year-over-year revenue declined less than 1% due to the impact of lower direct mail volumes, which offset higher first class mail volumes related revenue. EBIT margin of 19.4% was an improvement of 130 basis points when compared to the prior year, through the operating expense reductions, which included the consolidation of some facilities.

Turning to the Digital Commerce Solution segment, revenue was $152 million and EBIT was $10 million. Year-over-year revenue grew 10.5% on a constant currency basis and 9% on a recorded basis. Segment revenue benefited from a 5% increase in software revenue and more than 20% increase in business services revenue.

The growth in business services revenue was driven by an increase in transactions associated with the company’s ecommerce solutions for cross-border package delivery. Business services revenue included a decline in marketing services revenue. EBIT margin for the Digital Commerce Solutions segment was 6.7%, an improvement of about 460 basis points versus the prior year, primarily due to a lower cost production in software.

That concludes my comments on our business performance this quarter. Now I’d like to update you on our 2013 guidance.

The company is reaffirming its 2013 annual guidance for revenue and free cash flow. The company still expects an annual revenue excluding the impact of currency to be in the range of a 1% decline to 2% growth when compared to 2012 and pre-cash flow to be in the range of $575 million to $675 million.

The company’s updating its 2013 annual guidance for adjusted earnings per share and for GAAP earnings per share from continuing operations to reflect the restructuring and asset impairment charges and a tax benefit recorded in the third quarter, as well as the expected costs related to debt retirement in the fourth quarter.

The company now expects adjusted earnings per diluted share from continuing operations to be in the range of $1.68 to $1.83. This includes the $0.06 per share tax benefit recorded in the quarter.

The company also now expected GAAP earnings per diluted share from continuing operations to be in the range of $1.39 to $1.54. This guidance includes $0.10 per share for the restructuring charges recorded to-date, $0.08 per share for the asset impairment charge related to the signed agreement to sell our headquarters building, $0.08 per share for costs associated with the first quarter debt tender, and $0.03 per share for a charge related to the estimated net cost associated with the planned early redemption of $300 million of debt in the fourth quarter. This guidance excludes any additional restructuring actions that may occur as the company implements plans to further streamline its operations and reduce costs.

That concludes my remarks. Operator, you may now open the line for questions.

Question-and-Answer Session

Operator

Thank you (Operator Instructions). And we will go to, our first question, Kartik Mehta with Northcoast Research. Please go ahead.

Kartik Mehta - Northcoast Research

Good morning Marc and Mike. Mike, I wanted to ask you about the equipment sales and what do you think is the primary reason that you are starting to see improvement in that area?

Marc Lautenbach

Well, as we pointed out since the beginning of the year, we saw this trend beginning to materialize. So Mike’s spoke about this for the last several questions and in some ways it’s just a materialization of what we have seen in the execution of the business. Well, I don’t think it’s a lot more complicated and totally consistent with kind of how we saw this unfolding.

Kartik Mehta - Northcoast Research

And then if you look at North America Mailing, this year constant currency was down about 5%. As you look at that business segment, what would you anticipate the trajectory of that business to be? Are we at a point where the declines in that business will be right around where it is now or is there an opportunity for that improve as you look at what the business conditions are like?

Michael Monahan

Hi Kartik, this is Mike. Yes, to address that I’d say the key is what you asked your first question around, which is getting the equipment sales line moving in the right direction, and certainly we saw the third quarter as an improvement over the trends, over the last several quarters and that’s a leading indicator ultimately of what will drive recurring revenue streams.

While we did see a little bump in the road in recurring revenue streams this quarter, we still believe the trajectory over the longer term is for improvement, particularly as we drive the equipment sales side of the equation. So our outlook remains the same. We are looking for stabilizing trends in the revenue and as you saw, a continuing improvement from a margin standpoint.

Kartik Mehta - Northcoast Research

And then just Mike, just the last question. Your use of fee cash flow as you go into next year and you’ve done a very good job of getting the balance sheet better. As you look at kind of where the balance sheet is now and the way your debt is, going into next year your use of free cash flow, will it be to continue to pay down debt of are there other opportunities for you?

Michael Monahan

We will continue to use a balanced approach as we look at it. We obviously will get the $300 million paid down in November, that’s post the PBMS disposition. That I think puts us in good stead from a ratio standpoint. But we’ll continue to manage our investment grade ratios, as well as look at, we are making certainly investments in the business and then we’ll look at acquisition and share repurchase as alternatives as we go forward.

Kartik Mehta - Northcoast Research

Thank you very much. I appreciated it.

Michael Monahan

Thank you.

Operator

And we’ll got to Shannon Cross with Cross Research. Please go ahead.

Shannon Cross - Cross Research

Thank you. I have a few questions. My first is, can you talk a bit more about the ecommerce solutions, what you’re seeing in terms of just specifics on expansion, countries, revenue, anything you can give us as background on how that business is trending.

Michael Monahan

Sure. In terms of the ecommerce business, we are up to about 37 countries that we offer that product in. That’s in partnership with eBay. We obviously offered to a number of ecommerce providers directly as well. We continue to see good growth in the revenue base as a result of significant growth in the number of packages shipped.

As you know, we’ve seen sequential growth over the last four quarters and it was the biggest contributor to that business services growth in the Digital Commerce Solution segment.

Shannon Cross - Cross Research

Okay and Mike, or actually Mike or Marc, in terms of the Nordic furniture business, which I covered your stock for a long time and I didn’t realized you sold furniture, I suppose I should have. But are there any other of those business that are sort of hanging out there to be sort of pruned from the portfolio or do you feel like things are pretty much cleaned up now?

Michael Monahan

Yes, I would say the Nordic furniture business, I think we referenced it once about a year ago, but it is a relatively small business. It came in with an acquisition of a mailing dealer in the Nordic several years ago and it was a product line really that didn’t fit with the overall direction and the strategic approach that we are taking.

I would say we continue to look at both, product lines and geographies, where we don’t see significant strategic fit in or value generation. I would say we have addressed a lot of the biggest things in the portfolio. So anything beyond this won’t be more modest in scale.

Shannon Cross - Cross Research

Okay, and then with the sale of the headquarters building, can you talk a little bit about how we should think about potential benefit from that, both from a cash perspective as well as you mentioned lower operating expenses, although I was assuming you would have rents. So how do we think about that in 2014?

Michael Monahan

Yes, in terms of this building, I think the operating expense savings is part of what we outlined is part of our $100 million to $125 million target of reducing expenses.

There will be a fairly good savings relative to owning this building and the depreciation in the building is obviously bigger than our needs going forward. We are able to leverage some of the other facilities we have and then focus on a smaller footprint headquarters. So we do think there is meaningful operating savings, as I said in concert with our overall program to reduce cost.

In terms of cash, we expect to exit the building probably mid year 2014 as we get online with the new space, and we would realize the cash from the sale at that point in time. It’s less than $15 million of cash we would expect out of the building.

Shannon Cross - Cross Research

Okay, great. And one last question, sorry about this. Maybe Marc, could talk about a bit about what’s going on in North American Mailing in terms of specifics on the recurring revenue stream. You talked about having lower income from some of the mailing, the support services that you provide to people for postage, but any specifics. I mean, is this pricing? Is this anything that you think will be recurring or does this have more to do with where interest rates are at and what you can charge?

Michael Monahan

Yes Shannon, it’s Mike. As you know we take depositions from customers for reserve account. The average balances were down year-over-year that fluctuates. So when we are talking about different between second and third quarter, we are talking about pretty small amounts here, so that was a driver between the quarters. We still think that the ongoing trajectory, this recurring revenue stream basis will go in the right direction.

Shannon Cross - Cross Research

Great. Thank you very much.

Marc Lautenbach

Thank you.

Operator

And we will go to the line of George Tong with Piper Jaffray. Please go ahead.

George Tong - Piper Jaffray

Good morning. Thanks for taking my questions. So first question on Digital Commerce Solutions; could you provide some color on how location intelligence performed within Digital Commerce. That’s a pretty big segment contributing about $200 million in revenues and then I have a couple of follow-ups. Thanks.

Marc Lautenbach

Sure. Location intelligence performed well, particularly for enterprise level customers, where we have seen continued leverage of that in particularly mobile applications. So as we outlined at Analyst Day, that’s one of the growth areas that we see as providing good opportunity for driving software growth and we did see, as I said good results in the enterprise segment.

George Tong - Piper Jaffray

Got you. Where would you say the majority of growth in Digital Commerce came from? Would you say it was from parcel management, given its the smaller part of Digital Commerce currently. So would you say that’s the majority of where the growth came from?

Michael Monahan

Yes, ecommerce certainly drove the bulk of the overall growth rate just because of its growth during the course of the year, where its starting from the very small base last year and had good ramping of the revue base. So it’s contributed meaningfully to the growth rate. But we did see software growth of 5% on a year-over-year basis, on a reported basis, and 7% on a constant currency basis. So its balanced, but certainly the ecommerce contribution was greater to the overall growth rate.

George Tong - Piper Jaffray

That’s helpful. And then related to that, if you look at margins for ecommerce – I’m sorry, for Digital Commerce Solutions for the quarter was 6.6%. That was on the lower side of my exceptions. Would you expect that to go higher over time, especially in the context of mitigating some of the higher margin declines in the SMB businesses?

Michael Monahan

Yes, that margin is really a mix, right. It’s a mix of a software business margin that’s somewhat more mature, along with really net investment in new businesses like ecommerce, Volly and even some of the shipping businesses. So the margin is reflective of that combination of investment and some more mature businesses.

George Tong - Piper Jaffray

That’s helpful and have you given the target of where you would like to see margins go to for digital commerce?

Michael Monahan

Again, it would be a bit of a blend, but we’ve outlined what we think are typical margins we should get in the software components on this business. Ecommerce is a mix of services and software so that maybe a little less, but certainly in a mature state, much higher than what we see today.

George Tong - Piper Jaffray

And my last question; related to your business portfolio reconciliation, could you tell us a little bit more about the Brazilian JV interest that you acquired and related to the Nordic furniture business, was that a margin diluted business?

Marc Lautenbach

Let me answer the second part first. Yes, the Nordic business was margin diluted. It was relatively low margin, because we resold other manufacturers furniture. We didn’t manufacture the products.

In terms of Brazil, we have developed the joint venture relationship over the last several years, really to enter the Brazilian mailing market. We today have our digital product in market there. We see opportunities both in the mailing and the software space. Software was not originally included in that JV. So, one of the benefits of taking 100% ownership of that business is to allow us to better take advantage of the total opportunity in the market by bringing those businesses together. It’s a relatively small business today, but obviously an end market with growth potential.

George Tong - Piper Jaffray

That’s very helpful. Thanks for the insight.

Marc Lautenbach

Thank you.

Operator

Then we’ll go to the line of Ananda Baruah with Brean Capital. Please go ahead.

Ananda Baruah - Brean Capital

Good morning, thanks for taking the questions. Marc and Mike, I was just wondering if you could talk about metering trends, small business metering trends both in the U.S. and Europe and what changes if any that you saw through the quarter. Thanks.

Marc Lautenbach

Sure. In terms of North America, I don’t think we’ve seen any real change in the trajectory of the meter base. I think it’s been relatively constant. In Europe we’ve seen actually improving meter base metrics in a number of those markets and that’s reflected I think in what’s already a relatively stable and modestly growing revenue base.

Ananda Baruah - Brean Capital

Got it, and expectation is for continuation of those trends, not seeing anything that would shift that in the near…

Marc Lautenbach

We don’t see anything that’s sure to change that trajectory.

Ananda Baruah - Brean Capital

And with regard to the recurring revenue, the change in the postal business, is that the only impact, the only shift in the recurring revenue stream that you guys are seeing and are expecting?

Marc Lautenbach

Yes, as I said I think quarter-to-quarter these things can vary. We are talking about $1 million to $2 million of differential here and we don’t see any significant changes in outlook, relative to what we have been talking to.

Ananda Baruah - Brean Capital

If you do the math, do you expect recurring revenue trends to begin to improve again going forward or should we expect things to flatten here maybe.

Marc Lautenbach

Yes, again we have a longer-term objective here of stabilizing the mail revenue base and the recurring revenue streams are certainly part of that and we continue to view that as the key strategy.

Ananda Baruah - Brean Capital

Okay, got it. And for the revenue growth guidance, the maintenance of that, just back of the envelope math for me suggests sequential growth in the December quarter, something mid-teens or maybe a little bit better, to get it up into the range and maybe there is currency that I’m not accounting for, but is that better than typical seasonality? Is that what is baked into your guidance? And if so, what gives you guys the conviction to see that, to get up into the revenue growth range? Thanks.

Marc Lautenbach

Ananda, you’re talking about total revenue growth?

Ananda Baruah - Brean Capital

Total revenue growth.

Marc Lautenbach

Yes, obviously in terms of the fourth quarter as we look ahead, if you look at the trends in the business, particularly the digital commerce space, positive growth there and improving trends across the rest of the business. We feel obviously reaffirming the guidance that we have the opportunity to do that for the full year.

Ananda Baruah - Brean Capital

And Mike, last one for me. I guess that you had a strong June quarter in production mail, obviously the September quarter being sort of a little lighter relative, I was surprised. What are you expecting for the December quarter from production mail?

Marc Lautenbach

Well, production mail, keep in mind that that can be influenced quarter-to-quarter by big deals and second quarter as we pointed out at that time I think picked up some benefit from things that didn’t close in the first quarter and probably got some things closed, that would have otherwise closed in the third quarter. So that was a bit of an aberration at 18% growth.

If you look back at what we said was the outlook for this space as a whole, low to mid single digits is an appropriate growth rate, but that is going to vary quarter-to-quarter.

Ananda Baruah - Brean Capital

Okay. So maybe to move those two quarters, then we can get a sense of the run rate that you guys are on?

Marc Lautenbach

Yes, I think if you look at the second quarter as probably an unusual quarter, then you can use that as the view of the trending.

Ananda Baruah - Brean Capital

Okay. Thank you very much.

Marc Lautenbach

Thank you.

Operator

Then we’ll go to the line of Chris Whitmore with Deutsche Bank. Please go ahead.

Chris Whitmore - Deutsche Bank

Thanks very much. I wanted to follow up on that, the last line to questioning with respect to your base. I’m a little confused as to why your recurring revenues would stabilize within your mailing business if you don’t see any change in trend occurring within your installed base. So in other words, if your installed base continues to decline with this rate, why would the recurring elements stabilize?

Marc Lautenbach

Yes, in terms of what drives that, there’s a couple of things Chris. One is, if you look at the equipment sales side, obviously to the extent that we can drive growth in equipment sales that will add to the base.

The second is supplies as a component of recurring revenue streams. Obviously the installed base of connect pluses can drive more positive supplies, revenue streams over time and then obviously pricing selectively in different markets can have an impact on those streams as well. So it’s really a combination of factors that we would expect to help improve that over time.

Chris Whitmore - Deutsche Bank

Okay. And then I wanted to follow-up and ask about the software business. If I look at typical seasonality in the software business, in going back to 2010, 2011, it looks like that business would typically be up high single digits, maybe even low double digits quarter-on-quarter.

This quarter it was actually down slightly sequentially, so I’m trying to understand kind of what you are seeing in terms of underlying strength or sustainability of growth in the software on a go-forward basis, because this quarter you had a pretty easy compare and seasonally it looked sub-seasonal. So can you maybe describe what your expectations are over the next six to 12 months in software and what kind of growth we should expect going forward?

Marc Lautenbach

Sure. Software first of all was up about 5% year-over-year, on a reported basis about 7%, on a constant currency basis in terms of the software revenue line, so back to a growth comparison.

In terms of seasonality in that, I would say the software business has some similar characteristics of the production mail business. Even that on a quarter-to-quarter basis it can be influenced by a big deal here or there, where we have the enterprise software license agreement.

So the goal here over the next six to 12 months is to continue to improve our go-to-market capability, to build strength in terms of our channels and continue to drive those products, particularly in the enterprise software space into the market place. So I would say this quarter was a step in the right direction, but we still have more work to do from a channel perspective, but we would expect to see this to continue to improve.

Chris Whitmore - Deutsche Bank

What about license sales year-on-year?

Marc Lautenbach

I don’t have that number off the top of my head.

Chris Whitmore - Deutsche Bank

Okay, thank you.

Marc Lautenbach

Thank you.

Operator

We’ll go to Glenn Mattson with Sidoti. Please go ahead.

Glenn Mattson – Sidoti

Hi gentlemen. So most of my questions have been answered, but I guess when you think about kind of software and the importance that’s going to play growing the business, are there any products that are, you know may be this is for Marc, but as you get more comfortable with the business, are there any products in the software segment that standout as potential growth drivers?

Marc Lautenbach

Yes, and I think that’s the ones we’ve talked about in May. We look at -- our location based solutions has been very well positioned competitively and as I visit with our clients, very good feedback from our clients. We certainly think our shipping in ecommerce, well again we’re seeing good growth there and getting very good feedback from our clients, so we think our software around our sorters inserters is well positioned.

So, I don’t see materially different opportunities for growth in those businesses than what we’ve seen so far and as I looked at not only kind of what we’ve accomplished in terms of prosecution over the quarters, but also our activity with clients, I’m very encouraged in terms of what we see going forward.

Glenn Mattson – Sidoti

And then in terms of ecommerce, obviously the business with eBay has been a tremendous success. Are you having conversations? Do you see any opportunity to broaden that out amongst any other potential big partners?

Marc Lautenbach

Yes.

Glenn Mattson – Sidoti

Okay, great thanks.

Operator

(Operator Instructions) And we have a question from James Cappello with Invicta Capital. Please go ahead.

James Cappello - Invicta Capital

Yes. Could you guys mention how much the revenue was from the Nordic furniture business and what was it?

Marc Lautenbach

Yes, the annual revenue in 2012 was about $68 million and its run rate per quarter was between $12 million and $15 million a quarter. The financial statements had been restated to exclude the results of the business and treated as discontinued operations.

James Cappello - Invicta Capital

Great, thank you.

Marc Lautenbach

Thank you.

Operator

Thank you and at this time there are no questions in queue. Please continue.

Marc Lautenbach

Good. Thanks operator and thank you everyone. As I said at the beginning of the call, I’m quite pleased with our third quarter performance and encouraged, very encouraged by our ability to execute against the strategy that we laid our earlier this year.

As you can see in this quarters results, we are not only focused on driving efficiency into our business, we’re also focused on growing our business. In the third quarter we realized double-digit growth in our digital commerce business grew EBIT in our SMB business and the summation of these two dynamics drove very strong cash flow.

We have tremendous opportunity before us and the steps and the actions we’ve taken over the past few quarters will further solidify our position for the future. I’ve said this before, it will take some time, but we’re on the right track and we’re very focused on finishing the year in a very strong manner.

Thank you again for your time and we look forward to speaking with you soon.

Operator

Thank you ladies and gentlemen. This conference will be available for replay after 10 o’clock a.m. today running through November 29, till midnight. You may access the AT&T replay system at any time by dialing 1320-365-3844 and when prompted enter the access code of 303326. Those numbers again are 1320-365-3844, access code 303326.

That does conclude your conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.

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